Using social media to be a better investor

Your Investments: Aaron Katsman interviews leading expert on using social media to become a better investor.

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With social media being all the rage, the question is whether investors can use
it to generate higher returns. I recently had the opportunity to sit down with
Zack Miller, who literally wrote the book on the topic and is a leading expert
on using social media to become a better investor. Here are some excerpts from
our interview.

Can you tell us a bit about your background?

I have a very
eclectic background, one that combines business and marketing roles for Internet
companies with investing.

I’ve been an analyst for a multinational hedge
fund as well as helped build some of the leading online finance companies today,
like Seeking Alpha.

You have become an expert in investing and social
media. Can you explain how investors can use social media to become better
investors?

Yeah, I wrote a book about the subject in 2010. Tradestream your Way
to Profits: Building a Killer Portfolio in the Age of Social Media is all about
using freely available tools to make better, smarter investment decisions. Some
really smart people are publishing their trading activities online. Step one is
to just plug into the collective intelligence, what I call the
tradestream.

Beyond that, much of what my research shows is that
investors can do well by mimicking the smart people they’re following. You don’t
have to find creative ways to beat the market; for many of us, that’s a sucker’s
game. Smart strategies that ape the one percent of investors who can regularly
perform well will also get us to the promised land of profits.

In my
book, I talk about various ways and tools to do that, including cloning
hedge-fund portfolios and tracking insider trading. There was a seminal research
piece a few years ago that really formed my thinking on the subject. It showed
that investors could come close to the returns Warren Buffett gets in his own
portfolio merely by copying the Oracle of Omaha’s moves when he files with the
SEC.

Can you tell us a bit about the piggybacking methods you have
developed?

So, I’ve been running what I call the Tradestreaming Guru Piggyback
Model for almost three years now with real money. It’s based upon work I
developed in my book. Essentially, I created a portfolio that winnows through
2,500 different hedge funds with different styles to create a balanced portfolio
that mimics the stock picks of some of the most profitable hedge-fund managers
out there. It’s almost like having an all-star investment team pick stocks for
you. It’s a collection of around 12 stocks that rebalances every quarter based
upon what the hedge-fund managers are doing with their own money.

What’s
important to note here is that I’m not just copying these managers’ moves
willy-nilly. My Guru Piggyback Model identified specific managers where this
strategy works well. High-frequency trading funds can’t be copied well. I look
for funds that take longer-term, sizable bets in individual stocks. I also tried
to pick funds that focus on different sectors so the portfolio will be better
balanced. Lastly, some funds replicate well when you buy their newest holding,
while others replicate better when you buy their largest.

Other picks are
popular picks – stocks that are held in multiple funds. So, there’s a lot of
moving parts here.

What tools are out there for individual investors to
learn about investing like the pros?

Caution, shameless plug... There’s my
aforementioned book, of course, that you can find on Amazon. I’m also writing
about a lot of this on my blog, Tradestreaming.com. In addition, there are many
sites like marketfolly.com and J3SG.com that track the picks of famous,
successful investors. But again, don’t buy a stock just because Investor X
bought it – that’s not a strategy. Piggyback investing works when there’s a
strategy behind the buying and selling decisions.

If it’s so easy to
invest like pros, why don’t individual investors have similar investment
returns?

Perhaps one of the best-known investors I know is Joel Greenblatt,
author of The Little Book that Beats the Market. He put up amazing returns for
20 years and shared his secrets in his book. Someone once asked him why he’s
giving away the special sauce and whether his public revelation of his methods
would scrap his technique. He said that he wasn’t afraid of everyone adopting
his techniques because individual investors have an extremely hard time sticking
to an investment strategy. They’d rather play investor cowboy than to implement
a rigorous buy/sell methodology.

Same is true with piggybacking; it
requires a strongly formulated strategy. There’s no stock picking that goes into
my portfolio; I developed the algorithm, tested rigorously and then every
quarter, buy and sell what the computer tells me.

It’s been extremely
hard for me as an investor to take this quantitative approach – I want to
believe I’m smarter than that. But it’s hard to beat returns of over 300% over
the past five years. I’m a believer now.

aaron@lighthousecapital.co.il

Aaron Katsman is a licensed financial adviser in Israel and the United States
who helps people with US investment accounts.

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